Non-residents trading in the UK: Treaty permanent establishment: agent of independent status
Where the agent acting for the enterprise is a broker, general commission agent or other agent of independent status acting in the ordinary course of their own business, then an agency permanent establishment of the client enterprise will not be brought into existence.
Whether an agent is of independent status is tested by reference to the legal, financial and commercial characteristics of the particular business relationship between the non-resident and the agent. If the relationship between them is the same as a relationship between independent businesses dealing with each other at arms length then the agent will be ‘an independent agent’. For example, an agent who acted for other independent unconnected businesses on the same terms as those under which he acted for the non-resident could be an ‘independent agent’ and it would be clear that the agent had been acting in the ordinary course of his business if his activities were repeated for various unconnected customers. Dependent or independent status does not turn on the shareholding relationship between principal and agent. The fact that an agent is a subsidiary company does not necessarily make it a dependent agent. However, a subsidiary company will constitute a PE of its parent company in the same way as any other agent of the parent company if the conditions stipulated in Article 5(5) of the OECD Model Treaty are met and independence by reference to the factors detailed in the guidance that follows cannot be demonstrated.
The terms ‘brokers’ and ‘general commission agents’ are not defined in the model treaty or commentary and so for interpretation in the UK they take their ordinary UK meaning. In the UK both terms have been used historically in the ‘machinery provisions’ for imposing the UK tax obligations and liabilities upon the UK representative. So if interpretation (for UK taxation) of either term under a treaty should be problematic, see the guidance at INTM269050.
Whether a broker, general commission agent or other agent acts in the ordinary course of their ‘own business’ is something that should be considered by reference to the behavioural facts as opposed to intentions not followed through in business performance. Matters relevant would include (but not necessarily be limited to) the number of unrelated principals that the agent acted for and the extent of the business activities customarily carried out within the trade of broker, commission agent or independent agent in the specific business sector concerned. The work done by an agent, where that work was all done for one non-resident client, is unlikely to be viewed as the conduct of his ‘own business’ but more likely that of the non-resident’s business. An exception to that view might be where the concentration on one client was an unusual occurrence within a settled continuous trade involving several clients.
Assuming they did act in the ordinary course of their own business, in general an agent would be independent and would not constitute an agency PE of the foreign enterprise for which it acts where it is independent of the principal enterprise both legally and economically. The commentary suggests that other relevant factors of independence may include:
- the extent of the obligations which the agent has regarding the enterprise;
- whether the agent is subject to detailed instructions or comprehensive control;
- whether the agent bears entrepreneurial risk;
- the degree of reliance on the agent’s special skill and knowledge by the principal in the business done, and
- Whether there is reference by the agent to the principal for approval of the manner in which the business is to be conducted.